The foundational goal of any business is to make a profit. As a business owner, that’s one of your key financial aims – to make enough sales, at a big enough margin, to generate profit from your enterprise. But how does profit differ from cash flow? And why is cash king?
How do profit and cash flow differ?
To really understand the difference between generating a profit and managing cash flow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cash flow is an invaluable business skill.
Let’s take a look at the differences:
- What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills, tax, etc. It’s driven by creating a profit margin and generating value from your products and/or services.
- What is cash flow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials, etc.
Why is positive cash flow so important?
‘Cash is king!’ may be a cliché these days, but it’s a maxim that underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cash flow then the business may not survive as long as the end of the year.
What’s needed is good cash flow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.
A business can generate high revenues and big profits, but still, be cashflow poor. In other words, it can have profits at the end of the period but have very little liquid cash to fund its day-to-day operations over the course of the period.
Cash flow management
Good cash flow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cash flow’ you need to proactively work to keep your inflows higher than your outflows.
With that, it’s a wrap from us!